Conflict and Raw Materials | Looking for Alpha


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By Erik L. Knutzen, Hakan Kaya

Russia’s invasion of Ukraine adds an unwanted geopolitical layer to the inflation challenge, and yet another reason to reintroduce commodities into asset allocation.

Russia’s invasion of Ukraine presented a particularly difficult situation for financial markets last week, after they had already weakened on concerns about high inflation and rising interest rates.

Even if this military action quickly establishes new facts on the ground, which seems unlikely, the political need for far-reaching punishment and sanctions against Russia means that the economic impact promises to be long-lasting.

The situation amplifies important aspects of our outlook for 2022 and 2023 – not only anticipating greater economic and market volatility, but the shift to a less favorable growth-inflation mix than what we experienced in 2021, and in fact what we have grown accustomed to over the past 20 years. For the same reasons, it also reinforces one of our main asset allocation themes: putting commodities back at the heart of the asset allocation debate.

A major supplier

Russian exports generally amount to less than $500 billion a year. In the context of total world trade of around $30 trillion, this seems insignificant.

When it comes to raw materials, however, Russia is a major supplier: raw materials account for almost 40% of its exports. The controversy over the Nord Stream 2 gas pipeline means that Russia’s role in meeting Europe’s energy needs is well known. But it is also a major supplier of the world’s aluminium, which is already in short supply, as well as significant shares of the world’s palladium, platinum, nickel and copper. Russia and Ukraine are major wheat suppliers. Sanctions and disruptions could limit the supply of these products in the coming months.

There were several reasons why commodities were a key theme in asset allocation, even before the events of last week.

One year ago, we wrote about why commodity prices have always tended to correlate with inflation. More recentlywe found that commodities tended to perform particularly well when inflation was high, but economic growth was weak or slowing.

We expect a shift to this less favorable growth-inflation mix in the months and years ahead, not least because, as Joe Amato wrote last week, central banks find themselves in the unusual position of tightening policy as growth declines. While the US recession is still not our base case, Russia’s invasion of Ukraine is likely to exacerbate growth and, to an even greater extent, the inflation side of that equation. .

Commodities are also geared towards the longer-term theme of transitioning to a net-zero electrified economy – significant long-term inflationary pressure. We believe that the price of traditional energy products will remain high as supply is reduced before alternative energy is developed. Demand for industrial and precious metals is also expected to increase to build the renewable energy, battery and electrification infrastructure of the net zero economy.

Again, Russia’s prominence in global markets for energy, aluminum, palladium, platinum, nickel and copper means sanctions risk worsening already growing shortages of these materials. raw.


In addition to driving higher prices on the commodity futures curves, growing supply and demand imbalances have shifted nearly the entire commodity futures complex to a forward, where shorter-dated contracts trade at higher prices than longer-dated contracts. This creates another incentive to invest, as it means that “rolling over” from one contract to another to maintain a long-term position in a commodity generates revenue.

And, finally, commodities have the potential to act as an important source of diversification when correlations between equities and bonds are on the rise. Since early December, according to Bloomberg data, the Bloomberg Commodity Index is up about 22%. Stock markets are in double digits in the red. The Global Aggregate Bond Index is down around 3.5%.

No wonder the guests of our European restaurant Solve for 2022 January conference was so bullish on commodities. They are just one of the asset classes that we believe have a role to play in mitigating and taking advantage of inflation in portfolios, but they are one of the most important. For a variety of reasons, including the tragic and destructive conflict currently underway in Ukraine, we believe the case for their inclusion in a diversified asset allocation has only grown stronger.

In case you missed it

  • Eurozone Industrial Purchasing Managers Index: -0.3 to 58.4 in February
  • US Manufacturing Purchasing Managers Index: +2.0 to 57.5 in February
  • US consumer confidence: -0.6 to 110.5 in February
  • Euro zone consumer price index: +0.3% month-over-month in January and +5.1% year-over-year
  • United States GDP in the 4th quarter of 2021 (second preliminary): +7.0% quarter-over-quarter annualized rate
  • Initial US Unemployment Claims: +232,000 for the week ended February 19
  • Sales of new homes in the United States: -4.5% to SAAR of 801,000 units in January
  • Durable orders in the United States: +1.6% in January (excluding transport, durable goods orders increased by 0.7%)
  • Personal income and expenses in the United States: Personal spending rose 2.1%, income was unchanged and the savings rate fell to 6.4% in January, month over month

To monitor

    • Tuesday, March 1:
    • Thursday March 3:
      • ISM non-manufacturing index
      • Initial unemployment claims in the United States
    • Friday, March 4:

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